iPhone SE: Why a 4-inch screen & what does it mean for Apple and its customers?

Apple just announced a new iPhone SKU to be added into its portfolio, namely the iPhone SE. The iPhone SE sports the latest specifications including a 64bit A9 Apple processor, 12 MP Camera, 4K video capture, Apple Pay, VoLTE and so forth. However, it sports a rather underwhelming and reverse-trending, smaller 4? display.

Why a 4? Screen & what does it mean for Apple?

We believe this is a classic Apple masterstroke strategy to continue to boost its ASP. Apple shipped almost 30 million 4? iPhones last year which is approximately 13% of the total iPhones sold in 2015. However, all of these 4? SKUs were three or four generations old. This means to suffice a small segment of consumers who want to buy the cheapest iPhone, Apple had to keep the production lines & supply chain open for these older gen iPhone SKUs. From a supply chain perspective, this is a logistics nightmare and not very prudent, especially for a company like Apple. In addition, the average price for these 30 million 4? iPhones was around $300. So, a $400/$500 iPhone SE definitely will boost the iPhones’ overall ASP and it will contribute to both top line and bottom line. The latest updated under the hood components also means it is in sync with the roadmaps of most major operators (e.g. China Mobile) in 2016. It also future proofs the 4? design for first time users or Android switchers to newer Apple services such as Apple Pay, as well as the other upgrades iOS9.3 delivers.

We believe the total addressable market or demand for 4? smartphones is shrinking. In fact, it has shrunk from 17% to less than 10% in just one year as consumers are moving towards buying bigger screen devices. We believe this is a temporary SKU to boost ASPs and satisfy the 4? market, which is limited and shrinking.

What does it mean for consumers?

Less than 10% of consumers are buying 4? screen devices and almost 75% of these consumers are buying at prices under $75. So, virtually the only TAM which Apple can attract at $400 is the installed base of current 4? iPhone users. The assumption that most of them will upgrade to a 4? iPhone SE is probably false as the trend towards larger displays continues. Many or most of them will upgrade to bigger display smartphones, possibly the iPhone 6/6S. However, with the iPhone SE Apple is catering to this niche segment of population with smaller hands or a preference towards a pocketable or ‘purseable’ design.

While the key markets will obviously be emerging markets like India, we believe the target demographics for the iPhone SE are quite varied. The iPhone SE subscriber will probably skew higher female, but will be diverse in markets such as China, Europe, and the US.

To summarize, the most important aspects of Apple launching the iPhone SE is it boosts the iPhone’s ASP and it gets more customers using the updated features and services of the latest OS. It also reduces the headache of carrying older generations of 4? iPhones, which were still preferred by 10-13% of the iPhone users every year.

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Neil is research director-devices & ecosystems at Counterpoint Research. In the last 10 years he has offered expert strategic advice that has been highly regarded across different industries especially in telecom. Prior to Counterpoint, Neil worked at Strategy Analytics as a Senior Analyst (Telecom).

Neil is research director-devices & ecosystems at Counterpoint Research. In the last 10 years he has offered expert strategic advice that has been highly regarded across Show more.. different industries especially in telecom. Prior to Counterpoint, Neil worked at Strategy Analytics as a Senior Analyst (Telecom).